The Germans Are Toxic Too.(International Edition)(bank capital )

Byline: Stefan Theil

Claims of safer banks now ring false.

German leaders have long boasted about the stability of their financial system, and lately have been blaming the global credit crisis on American irresponsibility. German finance, they brag, is dominated by stodgy insurance companies and public banks; fueled by a high national savings rate and capital surplus; and governed by consumer-lending practices so strict that an American subprime-mortgage borrower wouldn't even qualify for an ATM card. Why, then, are German banks holding hundreds of billions worth of impaired assets? The IMF won't release country?-by-country figures, but it expects total financial--sector write-offs to be higher in Europe than in the U.S. through 2010; of those, a large part will likely come from German banks. EU Commissioner Gunter Verheugen last month slammed German banks for having been "world champions in risky banking transactions." BaFin, the German financial regulator, leaked a list in April that put German banks' troubled assets at [euro]800 billion, a figure the agency has since denied. Considering that one single bank, Munich-based Hypo Real Estate, has already racked up more than [euro]100 billion in liquidity support (and counting), the number doesn't seem so far off.

German banks weren't just victims of Anglo-Saxon cowboy banking, but were among its most aggressive players from the start, pouring the country's capital surplus (second only to China's over the last five years) into high-risk areas like U.S. toxic assets, Spanish real estate and Irish hedge funds. Private institutions like HRE and Dresdner, both now partially nationalized, and Deutsche Bank, whose investment-banking arm was deeply involved in toxic securities, were highly leveraged. By some estimates, German banks at the outset of the crisis had an average ratio of debt to net worth of 52 to 1, compared with 12 to 1 in the U.S. Even those supposedly conservative public banks, or Landesbanken, are fast turning into bottomless pits for the German taxpayer. Together with the public savings banks, the Landesbanken control 40 percent of the German banking market. Mismanaged, opaque and supervised by local politicians, these banks have for decades abused their government ownership to get themselves into crisis after crisis. Last week another [euro]4 billion of public money (bringing the total to [euro]9 billion) went to keep afloat Dusseldorf-based WestLB, which EU Commissioner Neelie Kroes blasted as another sign of the public banks' "chronic disease."

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